198 QUARTERLY JOURNAL OF ECONOMICS overseas demand for its highly standardized product was already sufficiently large at that time to exhaust the obvious scale advan- tages of manufacturing in a single location,especially if that location was one of high labor cost. In an area as complex and "imperfect"as international trade and investment,however,one ought not anticipate that any hypoth- esis will have more than a limited explanatory power.United States airplane manufacturers surely respond to many "noneco- nomic"locational forces,such as the desire to play safe in problems of military security.Producers in the United States who have a protected patent position overseas presumably take that fact into account in deciding whether or when to produce abroad.And other producers often are motivated by considerations too complex to reconstruct readily,such as the fortuitous timing of a threat of new competition in the country of import,the level of tariff protection anticipated for the future,the political situation in the country of prospective investment and so on. We arrive,then,at the stage at which United States producers have come around to the establishment of production units in the advanced countries.Now a new group of forces are set in train. In an idealized form,Figure I suggests what may be anticipated next. As far as individual United States producers are concerned,the local markets thenceforth will be filled from local production units set up abroad.Once these facilities are in operation,however,more ambitious possibilities for their use may be suggested.When com- paring a United States producing facility and a facility in another advanced country,the obvious production-cost differences between the rival producing areas are usually differences due to scale and differences due to labor costs.If the producer is an international firm with producing locations in several countries,its costs of financ- ing capital at the different locations may not be sufficiently different to matter very much.If economies of scale are being fully exploited, the principal differences between any two locations are likely to be labor costs.7 Accordingly,it may prove wise for the international firm to begin servicing third-country markets from the new location. And if labor cost differences are large enough to offset transport is filled with observations that lend casual support to the main hypotheses of this paper. 7.Note the interesting finding of Mordecai Kreinin in his "The Leontief Scarce-Factor Paradox,"The American Economic Review,LV (Mar.1965), 131-39.Kreinin finds that the higher cost of labor in the United States is not explained by a higher rate of labor productivity in this country.198 QUARTERLY JOURNAL OF ECONOMICS overseas demand for its highly standardized product was already sufficiently large at that time to exhaust the obvious scale advan￾tages of manufacturing in a single location, especially if that location was one of high labor cost. In an area as complex and "imperfect" as international trade and investment, however, one ought not anticipate that any hypoth￾esis will have more than a limited explanatory power. United States airplane manufacturers surely respond to many "noneco￾nomic" locational forces, such as the desire to play safe in problems of military security. Producers in the United States who have a protected patent position overseas presumably take that fact into account in deciding whether or when to produce abroad. And other producers often are motivated by considerations too complex to reconstruct readily, such as the fortuitous timing of a threat of new competition in the country of import, the level of tariff protection anticipated for the future, the political situation in the country of prospective investment and so on. We arrive, then, at the stage at which United States producers have come around to the establishment of production units in the advanced countries. Now a new group of forces are set in train. In an idealized form, Figure I suggests what may be anticipated next. As far as individual United States producers are concerned, the local markets thenceforth will be filled from local production units set up abroad. Once these facilities are in operation, however, more ambitious possibilities for their use may be suggested. When com￾paring a United States producing facility and a facility in another advanced country, the obvious production-cost differences between the rival producing areas are usually differences due to scale and differences due to labor costs. If the producer is an international firm with producing locations in several countries, its costs of financ￾ing capital at the different locations may not be sufficiently different to matter very much. If economies of scale are being fully exploited, the principal differences between any two locations are likely to be labor costs.7 Accordingly, it may prove wise for the international firm to begin servicing third-country markets from the new location. And if labor cost differences are large enough to offset transport is filled with observations that lend casual support to the main hypotheses of this paper. 7. Note the interesting finding of Mordecai Kreinin in his "The Leontief Scarce-Factor Paradox," The American Economic Review, LV (Mar. 1965), 13139. Kreinin finds that the higher cost of labor in the United States is not explained by a higher rate of labor productivity in this country